A German model for Europe?

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Since the euro crisis began, many have seen the German economy as the model for the rest of Europe to emulate. In particular, the reforms of Chancellor Gerhard Schröder are credited with laying the ground work for current German economic success and global competitiveness by tackling an excessive welfare state and sclerotic labour market.

But research in a new ECFR paper by Sebastian Dullien - A German model for Europe? - suggests this argument is wrong. Sebastian says Germany’s current strength comes from wage restraint and pressure on education and research and development – a formula that would harm other European economies if it was applied more widely.

The German approach has involved cuts to research and development, and to education – if this is copied elsewhere it would result in a lower rate of technological progress, harming long-term growth.

Emulating Germany’s deflationary wage policy across Europe would reduce aggregate demand at a time when the EU’s companies are looking for customers.

Widespread wage restraint could also lead to a mutually destructive “beggar thy neighbour” situation in Europe, with each country holding down earnings in an attempt to make their own economies more competitive.

“The German model cannot be a blueprint for Europe. Instead of trying to copy the German approach as a whole, European leaders should carefully examine which of the elements of German reforms could actually increase productivity, output, and employment without detrimental effects on the partners or on long-term growth” - Sebastian Dullien